Lew Says He Didn’t Know Money-Losing Fund Was in Caymans

U.S. Treasury Secretary Nominee Jack Lew, President Barack Obama’s former chief of staff and ex-director of the Office of Management and Budget, worked as a Citigroup executive from 2006 before joining the Obama administration at the State Department in 2009. Photographer: Joshua Roberts/Bloomberg

Feb. 13 (Bloomberg) -- Jack Lew, the nominee for U.S.
Treasury secretary, said he wasn’t aware that a personal
investment involved a fund in the Cayman Islands and he lost
money when he sold the holding.

Lew, selected by President Barack Obama last month to
succeed Timothy F. Geithner, responded to senators’ questions
about the investment and his work at Citigroup Inc. as he
testified at his confirmation hearing before the Senate Finance
Committee in Washington today. Lew also said he sees
opportunities to broaden the tax base and lower corporate and
perhaps individual tax rates.

Committee Chairman Max Baucus, a Montana Democrat, said a
vote on Lew’s nomination would likely occur after the Senate
returns from next week’s scheduled recess. It would then go to
the full Senate, and Baucus said he expected Lew to be
confirmed.

So far, no Republicans on the panel have said how they will
vote on Lew’s nomination. Senator Charles Grassley, an Iowa
Republican, said in a statement after the hearing he was
surprised that Lew professed to be unfamiliar with a Cayman
Islands address associated by critics with tax avoidance.

Lew’s testimony was “jaw-dropping,” especially given that
Obama and Democratic senators have repeatedly mentioned the
office building where the Citigroup fund was located, Grassley
said.

Grassley’s Doubts

“I have serious doubts about whether the president made
the right choice,” he said.

Lew invested $56,000 in the Citigroup fund in the Caymans
and sold it for $54,418, according to Sean Neary, a spokesman
for the committee. Responding to questions from Baucus, Lew said
he divested the fund after he took a government position in 2009
and paid any taxes owed.

“My benefit was really very small in the sense that I took
a loss when I sold the investment,” Lew said.

Grassley noted that Obama has criticized Cayman
investments.

“You invested more money there than the average American
makes in a year,” Grassley said. “There’s a certain hypocrisy
in what the president says about other taxpayers and your
appointment.”

Hedge funds often establish investments in the Cayman
Islands to limit potential taxes for nonprofit and foreign
investors.

Citigroup Bonus

Grassley also questioned a $940,000 bonus that Lew received
in January 2009 as Citigroup was receiving federal bailout
funds.

Lew said he was paid in the same manner as other private-sector employees in similar jobs.

“I think I actually performed quite well in managing the
business operations,” he said, citing real estate sales and
other moves to make the company more efficient.

Lew, 57, is Obama’s former chief of staff and was director
of the Office of Management and Budget under both Obama and
President Bill Clinton. He said the country needs “balanced”
deficit reduction that includes more revenue and changes to
entitlement programs.

Republicans reject that combination of taxes and spending,
a divide that will make it difficult for Congress and the
administration to agree on rewriting the tax code.

“The best thing would be for us to do both individual and
business tax reform,” Lew said. “The challenges are many, but
I think once we’re doing tax reform, we should do it right.”

Tax Rates

Republicans say any revenue gained from broadening the tax
base should be used to lower tax rates, not reduce the deficit
or pay for spending. Lew said he supported a lower corporate tax
rate and that he hoped individual rates could be reduced too.

“The goal in all this should be getting the rates down and
promoting economic growth,” said Senator John Thune, a South
Dakota Republican.

Treasuries extended losses, pushing 10-year yields higher
for a third day, as the U.S. sold $24 billion of the securities
after a report showed retail sales rose for a third straight
month.

The yield on the current 10-year note rose five basis
points, or 0.05 percentage point, to 2.03 percent at 4:55 p.m.
in New York, according to Bloomberg Bond Trader prices. The
yield touched 2.058 percent on Feb. 4, the highest level since
April 12.

International Taxes

On international taxes, Lew said there is “room to work
together” to make changes that could lead to lighter burdens on
some foreign income of U.S. companies.

His comments referred to the international tax system as a
“dial,” not a binary choice between a territorial system that
exempts foreign income of U.S. companies or a worldwide system
that taxes it at the U.S. rate. He said that the current system,
often labeled worldwide, is already a hybrid.

He emphasized that the administration supports a global
minimum tax. Still, his comments suggested that the
administration could support a system that is nominally
“territorial” like Republicans want and include limits on
companies’ ability to locate income in low-tax or no-tax
countries.

Senator Orrin Hatch of Utah, the top Republican on the
Finance Committee, focused on Lew’s time working at Citigroup
Inc. and questioned whether Lew could work as the chairman of
the Financial Stability Oversight Council as it oversees the so-called Volcker Rule designed to separate proprietary trading
from traditional banking.

‘Awkward Situation’

“If you were to be confirmed, it could lead to an awkward
situation in which, in your role as chair of the FSOC, you would
effectively be saying to financial firms: ‘Do as I say, not as I
did,’ ” Hatch said, adding that Lew was “well-compensated” at
Citigroup. “These are not trivial matters. Indeed, they bear
directly on your qualifications.”

Lew worked as a Citigroup executive from 2006 before
joining the Obama administration at the State Department in
2009. His tenure at New York-based Citigroup overlapped with the
U.S. government’s $45 billion bailout during the 2008 global
crisis. Citigroup later repaid the government funds.

Lew served as managing director and chief operating officer
of Citi Global Wealth Management. In 2008 he moved to Citi
Alternative Investments, which managed billions of dollars in
private-equity and hedge-fund investments, some of which were
under pressure as the financial crisis neared. A group of the
unit’s municipal bond funds lost most of their value that year,
placing the bank at the center of a regulatory probe and a wave
of litigation from investors.

Not Responsible

Lew said he wasn’t responsible for Citigroup’s investment
decisions.

After the hearing, Hatch declined to say whether he’ll
support Lew’s nomination.

In response to questions from Democratic senators Sherrod
Brown of Ohio and Bob Casey of Pennsylvania, Lew said the
Chinese yuan is still undervalued.

“We pushed back on our perception that the currency is
undervalued,” Lew said. “We made progress. It is still
undervalued and more progress” needs to be made.

He also reiterated the U.S. government’s “strong dollar”
policy.

Lew responded to criticism from Republicans that he came up
with the idea for sequestration, the across-the-board cuts, half
in defense, that are scheduled to start March 1. The cuts result
from a budget agreement reached in August 2011.

The reality, he said, was “more complicated” than that
because he was trying to broker a deal that would include an
increase in the federal debt ceiling.

“I look back at a time when a lot of people thought we
were going to default,” Lew said. “That was not an acceptable
option.”

Lew was introduced and endorsed by Senator Charles Schumer,
a New York Democrat and Pete Domenici, a former Republican
senator from New Mexico.